Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's currencies and markets action in their 'Never a dull moment' report, including news of growing fears of a European financial markets meltdown and concerns about the US budget situation as politicians squabble again ahead of a key deadline.

The New Zealand dollar weakened further this week towards a six month low as the worry about a European financial crisis dragging the global economy into another recession hit commodity prices and the currencies seen most exposed to commodity prices.

Bell said the interconnectedness of the financial markets with banking systems and sovereign debt markets made the spread of fear about Southern European sovereign debt a concern for financial markets and economies generally.

"This whole thing continues to spiral and it's a really bad cycle because as these yields go up the cost of servicing their debt is more expensive, which makes it even more difficult for them to get out of their negative positions," he said.

"It's a very bad cycle and it doesn't seem likely to end very soon."

Bell said the European Central Bank needed to step in to stabilise the situation, but the ECB remained reluctant. France had called on the ECB to intervene, but Germany was concerned the ECB did not deviate from its inflation fighting mandate to bail out deficit-ridden countries in Southern Europe.

"But there is no other lender of last resort available. in Europe. Compare that to the US where the Fed have done everything they can, printed money and monetised their debt. On the flip side you've got Europe and the ECB just not prepared to take that step," he said.

The New Zealand dollar remained under pressure while the financial turbulence darkened the outlook for global growth and commodity prices.

"In an environment where we see potential contagion into global credit markets you see investors dumping risk assets like currencies, commodities and equities to get into safe haven assets such as US Treasuries," he said.

US budget crisis

America's failure in August to solve its debt ceiling crisis prompted the downgrade of its credit rating by Standard and Poor's to AA+. Now a 'super-committee faces a November 23 deadline to find US$1.2 trillion of deficit cuts or massive automatic cuts will slice into US economic growth.

Bell said there remained the possibility of a further sovereign credit rating downgrade if the 'super-committee' fails again.

Australian surprise and possible RBNZ cuts

Minutes for the Reserve Bank of Australia's early November rate cut were surprisingly hawkish this week, with the commentary suggesting further rate cuts were off the table in Australia.

Changing market expectations for the potential cut in the Reserve Bank of New Zealand's Official Cash Rate on December 8 had also weakened the New Zealand dollar vs the Australian dollar.

"The European debt crisis will be a big concern for the RBNZ, as is seeing these funding costs rising around the world," he said.

"Also, I think they generally want the New Zealand dollar and if they cut interest rates that would see a selloff in the Kiwi dollar."

Trading ranges

The New Zealand dollar was trading in a range from 75.5 USc to around 79 cents, with the potential to drop towards 73 USc in the coming weaks if the European debt market turmoil worsens and the support around 75 US cents breaks.

Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.